Alpha Metallurgical Resources - Earnings Call - Q3 2020

Transcript

Speaker 0

Good morning, and welcome to the Contura Energy Third Quarter twenty twenty Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Emily O'Quinn, SVP, Corporate Communications.

Please go ahead.

Speaker 1

Thanks, Eilie, and good morning, everyone. Before we get started, let me remind you that during our prepared remarks and the Q and A period, our comments relating to expected business and financial performance contain forward looking statements, and actual results may differ materially from those discussed. For more information regarding forward looking statements and some of the factors that can affect them, please refer to the company's third quarter twenty twenty earnings release and the associated SEC filings. Please also see those documents for information about our use of non GAAP measures and their reconciliation to GAAP measures. Participating on the call today are Contura's Chairman and Chief Executive Officer, David Stepson and Chief Financial Officer, Andy Edson.

Also participating on the call is Jason Whitehead, our Chief Operating Officer, who is available to answer questions on operations. With that, I'll turn the call over to David.

Speaker 2

Thanks, Emily. Good morning to everyone on the call, and thank you for joining us today. What an interesting and challenging year 2020 has given us. Just in the last few months, we've seen met prices dip to $105 spring back to $126 and just recently settled around 114 We've managed through the pain and hardship of the virus, assuring our teams have been well protected as possible while still operating our business, dealing with economic implications and uncertainties in the domestic and international markets that we serve and preserving our capital to strengthen our long term sustainability. When we announced our first quarter operating results earlier this year, they were simultaneously praised and questioned as to whether our costs could be sustained at those levels.

Then we reported our second quarter results reflecting lower cost. But again, I heard that we had to prove our ability to sustain our cost performance in order to be considered one of the lowest cost producers in the metallurgical space. Well, as everyone has read this morning, I'm pleased to announce that we have another solid quarter to report on today. The Contura team continues to do a great job of being vigilant and flexible, so we can adapt as necessary. And I've said before, we choose to closely manage the business based on factors we can control and this mindset has resulted in another solid quarter for Contura.

Before I get into the details of the third quarter and our specific results, I want to briefly comment on last week's presidential election. Like the majority of the business community, we pay attention to politics. We seek to understand how election results may influence or impact our business. But our goal in the way we manage our business is for our company to be successful regardless who sits in the White House or which party controls Congress. I don't say this to diminish the importance of elections in any way because they are critically important to our democracy.

We regularly engage in dialogue with elected officials at all levels to help inform them as to the importance of our products in manufacturing and the underpinning that they provide to a strong economy. However, election outcomes will never change the core principles that anchor our daily operations. Safety, responsibility, environmental stewardship and continuous improvement will continue to drive our actions each and every day. And we remain committed to those important aspects of who we are and how we operate. Turning now to our quarterly results, which include adjusted EBITDA of $20,000,000 for the quarter and the best cost performance on record for Central AppNet since the start of the company over four years ago.

Andy will provide a more robust overview of the numbers after I finish my remarks, but I have to congratulate Jason and his team on repeatedly exceeding expectations and at just $66.49 a ton for the quarter, managing to beat our prior record setting net cost performance. Importantly, all this progress has occurred while keeping safety in the forefront at all times. I simply can't say enough about the job they've done this year. I'll briefly comment on our 2021 guidance and let Andy go into more detail. We are pleased with our committed met only position in the Central App met segment with 34% of the anticipated midpoint of our shipments locked in for next year.

The average price per committed tons for the met only portion of the segment is just over $86 a ton. We expect to continue our strong cost performance with Central App cost per ton anticipating the range of $68 to $74 As for 'twenty one CapEx, we expect to come in significantly lower than our spend in 2020 at a range of 80,000,000 to $100,000,000 We project SG and A for next year to be in the 45,000,000 to $50,000,000 range, which is slightly better than our 2020 expectations. In addition to closely managing our costs, we've been operating with a strong focus on cash preservation, not only to help us weather the effects of the pandemic, but also help us navigate softness and recent volatility in the pricing of our products. As we predicted on our last call, the back half of 2020 has so far proven challenging, albeit with sporadic signs of optimism. We continue to believe we're doing what we can to manage through these challenges, and the guidance we're issuing today reflects our thinking about what 'twenty one will hold.

I reiterate our prior statements from the second quarter call with regard to the long term, big picture strategy for Contura. We are accelerating our strategic exit from thermal coal mining, and we've made great strides in executing our strategic vision to become a pure play metallurgical coal company, providing critical feedstock for the steel production. As we discussed in prior quarters, our portfolio optimization efforts include bringing on some new met properties that are currently in development or being prepared to run-in the future, while deemphasizing or removing from our portfolio other mines that are mining out, uneconomic or no longer offering synergistic value in terms of coal qualities, market demand or cost structure. Whenever there is a property that is idled or mined out, we look for opportunities to realign our coal processing workflows into fewer plants and to redeploy mine equipment to other locations in the company. These efforts allow us to tighten our cost structures and make the best use of existing capital in the organization.

We regularly evaluate our portfolio and have been planning for the best utilization of our newer high quality mines. We continue to be on track or in some cases even exceeding our expectations in that regard. For example, Black Eagle is nearly finished with the corridor to the main reserve body, where we anticipate multi section production next year. We have accelerated our third section at Road Fork 52, with Section three now expected in early December instead of first quarter of 'twenty one. Lastly, the surface infrastructure installation is almost complete for our Lynn Branch underground mine with intake and return shafts in place, belts installed and the finishing touches being put on the track tunnel.

We remain excited about these properties and we'll keep you updated on their progress. Like our peers, Contura has closely watched the market landscape and the ebbs and flows of recent weeks. Pricing was soft throughout the better part of the quarter, then increased significantly before dropping meaningfully again in the recent weeks. Within the quarter, we received communication from customers either lifting or ceasing their force majeure notices. And also negotiated agreements with certain customers to defer anticipated shortfall volumes from 2020 into 2021.

We have largely seen limited impact of these circumstances to our metallurgical coal sale volume and production for the third quarter. Before I wrap up my prepared remarks, I want to congratulate our environmental and safety teams on another strong quarter performance. Our environmental teams continued their near perfect water quality compliance rate and a significant reduction in violations against the rolling three year average. Our safety teams ended the quarter with all metrics favorable to national average. Additionally, two of our Virginia subsidiaries were recently presented with the safety awards from the State Department of Mines, Minerals and Energy for reaching milestones of work hours without lost time accidents.

Those are operations of the McClure Prep Plant, Long Branch Surface and Long Branch Highwall. Congratulations to each member of these teams and we look forward to your continued success. I will now turn the call over to Andy for some additional details on our financials.

Speaker 3

Thanks, David. Good morning, everyone. As David commented on the multitude of uncertainties facing the world and our industry, our goal is to find ways to alleviate these risks in order to build a stronger, sustainable enterprise. Not to be redundant to what we've said in prior quarters, but the way we believe this is best done is by focusing on the issues we've mentioned many times before: effective cost management, matching of production with demand and most importantly, the sharp focus on cash flows and cash preservation. To that end, if we take a closer look at our balance sheet and cash flows for the quarter, we ended the quarter with approximately $162,000,000 in unrestricted cash.

Our ABL is at capacity right now due to the marketing impact or the market impact on our borrowing base both through accounts receivable and inventory. So we have no additional availability there. But quarter over quarter, we did use approximately $77,000,000 in cash. And to dig into that a little bit, give you a better picture of the usage in the quarter. We did reduce our debt by more than $30,000,000 to $598,000,000 during the quarter.

This debt reduction included ABL payment of approximately $12000000.17500000.0 dollars in legacy payments related to the LCC note and a small term loan principal payment of $1,400,000 We also had $13,000,000 in cash interest payments, and we paid an additional $30,000,000 in other legacy payments. Those include such things as pension and then some of the other legacy bankruptcy items that we've been clearing out. On top of those payments, we also provided roughly $19,000,000 in additional cash collateral for surety bonding. As we discussed a couple of quarters ago, it was a little bit of a harbinger of things to come, but the surety markets, insurance markets, all these peripheral markets that we have to deal with for services become even more challenging day by day. So the third quarter for us was certainly no exception.

We continue to see some benefit from our working capital, mainly inventory and accounts receivable, which provided a total of $30,000,000 of cash in the third quarter and basically covered our CapEx for the quarter. Going back to the ABL for just a second, we had borrowed and drawn down against ABL earlier this year in March. At quarter end, that facility was down to $18,400,000 in outstanding borrowings and it had about $122,000,000 of letters of credit outstanding as of the end of the quarter. Subsequent to the quarter end, we paid an additional $15,000,000 of the principal. And so the current outstanding borrowings on the ABL as of today is approximately $3,400,000 So we've about worked that back down.

Next, I wanted to give a quick update on a couple of tax related items. We still anticipate that we'll receive our $66,000,000 AMT credit monetization refund in the coming weeks. It has suffered from a couple of processing delays, but we feel pretty good that we may actually receive it at some point this week, but certainly in the next couple of weeks. Also in connection with the CARES Act, as we've mentioned previously, we still expect to defer approximately $14,000,000 in payroll taxes until 'twenty one and 'twenty two with the total deferral amount distributed evenly across both years. Finally, we anticipate an additional $70,000,000 NOL carryback related tax refund in the '1.

Moving to our financial results for the quarter. Our EBITDA increased $3,000,000 quarter over quarter from 17,000,000 to $20,000,000 despite the continued decline in market prices relative to the second quarter. The strong EBITDA performance was driven by another quarter of excellent cost containment, particularly in the CAPP Met segment, where we reported the lowest full quarter cost since the inception of Contura of $66.49 The third quarter CAPP Met costs were approximately $3.5 lower than the second quarter costs, if you kind of adjust Q2 for a more normalized run rate if you exclude the impact of our April furlough and other onetime type issues. On a three quarter moving average basis, and this is really a testament to the sustainability of some of these cost increases we've seen. Three quarter moving average basis, our current average is $70.53 down more than $5 over the prior three quarter moving average and down from a high of nearly $90 a ton.

So again, David mentioned the performance of the operating team. Just when we think that Jason and the operating team have kind of hit their peak as far as cost reduction, they go and they drop a quarter like this on us and we have to come up with new words to describe it. So just incredible, incredible work there. Overall, CAPP Met generated $18,000,000 of EBITDA during the quarter, basically flat with the prior quarter, while NAPP contributed $7,000,000 of EBITDA. The CAPP Thermal segment contributed more than $5,000,000 of EBITDA in the quarter.

Naturally, SG and A expenses aren't allocated into the segment. So to get the total, that would have to be added back in. On the shipments and revenue front, our CAPP net shipments remained strong in the third quarter with total volumes of 3,300,000 tons shipped. That's up about 100,000 tons from second quarter. And then the trend we've seen over the past couple of quarters naturally our revenues continue to be negatively impacted by a soft market particularly in the export market, with our cap net realizations down approximately $8 a ton to around $74 a ton in the third quarter.

Cap thermal volumes were essentially flat with second quarter total shipments of around 600,000 tons and realizations improving to just under $58 a ton from $50 in the prior quarter. Prior quarter, we did have some cleanup of some lower quality thermal coal that impacted pricing. We also had some customer mix issues, but I think third quarter realizations were more in line with Q1 as our customer mix got back to a more normal baseline. Baseline. Northern App revenue improved as a result of higher volumes with prices effectively flat at $40 a ton.

Our shipments were up by about 300,000 tons, 1,600,000 tons all in. SG and A, excluding noncash stock comp, onetime items was $13,500,000 in the third quarter compared with $10,000,000 in the second quarter. And our third quarter CapEx was down $13,700,000 to just under $28,000,000 Looking at 2021. As David hit some of the hot spots earlier, we do expect to ship a total of between twenty point four million and twenty two point two million tons in 2021. 12,500,000 to 13,000,000 tons of that will be pure met flowing through the CAPP Met segment, will be approximately 1,000,000 to 1,500,000 tons of thermal that will also be going through that segment as kind of tangential or incidental production.

For the CAPP Thermal segment, we're guiding to 1,300,000 to 1,700,000 tons and 5,600,000 to 6,000,000 tons of Northern App. The CAPP Thermal reduction relative to 2019 is part of our ongoing and planned strategic focus toward moving toward a pure play met company. Based on the midpoint of our CAPP Met guidance, the met only portion of that is 34% committed and priced at $86.41 with an additional 27% committed but unpriced. The thermal portion of the CAPP met segment is 72% committed and priced at an average price of $52.11 And we're essentially fully committed in price in CAPP Thermal and Northern App at $57.17 and $40.43 respectively. Looking at cost for next year, we expect our CAPP Met cost to be in the range of 68 to $74 while CAPP Thermal should come in between $45 and $49 per ton.

And that is holding relatively static at $33 to $37 a ton. SG and A excluding non cash stock comp and one time items is forecast to be in the range of 45,000,000 to $50,000,000 Also as you can see from David's earlier comment, we're expecting our 2021 CapEx to be significantly lower than where we were trending in 2020. We expect it to be near a more regular maintenance level of 80,000,000 to $100,000,000 as most of our growth CapEx was spent in the past two years, and we don't have any large near term projects to address. Idle operations expenses are expected to be between 27,000,000 and $33,000,000 as we continue that aforementioned shift away from thermal coal production. Cash interest should come in roughly around between 51,000,000 and $55,000,000 in 'twenty one, while DD and A is expected to be down meaningfully in the range of 160,000,000 to $175,000,000 mostly due to the previously announced impairments and write downs in the second quarter.

And finally, the cash tax rate should be near zero. Before we open up the call for Q and A, I want to briefly mention that we still don't have any meaningful updates from the Department of Labor on our appeal regarding collateral amounts for certain black lung obligations. So we don't have any updates to share there. However, once something conclusive is determined, we'll obviously share that information with you. So with that, operator, we're ready to open the line for questions at this time.

Speaker 0

Our first question today comes from Lucas Pipes with B. Riley Securities.

Speaker 4

Hey, good morning, everyone, and congrats on the outstanding cost performance. Really great to see. I also want to thank you for the 2021 outlook at this point and all the encouraging updates included there. And my first question is on the cost side. You mentioned in the release and your prepared remarks a couple of drivers, productivity, labor costs, sourcing.

Can you provide a little bit of a breakdown on the what these various buckets contributed in terms of dollars per tonne vis a vis maybe the third quarter twenty nineteen, just so that we have a kind of good sense for where the bulk of the savings came from? Thank you very much.

Speaker 3

Hey, Lucas, it's Andy. So that's a little bit of a tough one because we've had so much transition going on inside the portfolio. The biggest driver and again, these overlap in significant fashion. Productivity really is the main driver here. It will obviously fall into separate buckets on your P and L and that is where the labor and the supplies per ton improvements come from.

We have seen slight reductions of each of those on an extended cost basis, but the real dropper is just the amount of tons flowing through the system. I'm probably feeling a little bit of Jason's thunder here if it came up in another question. But when you look at our portfolio from 2019 rolling into most of 2020, we had roughly twenty two minutees contributing to the portfolio. That has continued to shift downward as we're consolidating production, optimizing outputs, taking higher cost mines out of the system to the point where when we get to probably the middle of next year, we'll have gone from twenty two to twelve minutees. So that's again, that's reflective of the kind of productivity improvements that we've seen really since Jason came on board, just re envisioning the entire portfolio.

So it's kind of a I'm running around the question to get to the answer, but it's really driven by the productivity impacts on those individual buckets Got rather than the buckets

Speaker 4

it. That's very helpful. I'll turn over to my second question. It's in regards to your 2021 met coal volume outlook. It's very robust, good to see.

But in to get to the question, kind of how do you feel about your sales book in regards to your sales outlook? And is there is the sales outlook, the shipment outlook for 2021 a reflection on the current forward curve on met coal? Or would you say, look, in any reasonable price environment, even what we've seen more recently, which, of course, hasn't been so great, to put it mildly, we would be able to put these tonnes to bed?

Speaker 3

Yes. I'll just hit a brief preface on that before I let Dan dig into the details that he wants to share. But I think when you look at our production, it's kind of looking mostly flat on the met side. 'twenty to 'twenty one maybe a slight tick up. But again, we don't have any better information than anyone else out there to go off of.

The futures are where they are. Everyone's optimistic about getting there, but we just don't know necessarily the timing or what the curve looks like to get there. So I think by and large, we're pretty comfortable. Dan and his team have done a fantastic job getting a domestic book locked into place in this kind of a challenging market. So I think we feel pretty solid about the volumes in total.

Naturally, we can't control the price. But Dan, anything you'd like to add to that?

Speaker 5

Thanks, Andy. Lucas, yes, I think we're comfortable going forward. We're shipping at about a rate of 3,000,000 tons a quarter this year and through some very difficult times and challenging markets and challenging times with our customers. And I think it's fair to say we're a little more optimistic about 2021 as far as the volumes. But we're moving the coal right now.

Moving it in Q4. We're going to move it into Q1 and Q2. And as far as the domestic book, we like our position there. We took the business that we felt like we wanted and left some business we didn't want. So I think we like the balance that we have.

Speaker 4

That's very good to hear. Thank you, everyone, for the color and continued best of luck.

Speaker 3

Thanks, Lucas. Thanks, Lucas.

Speaker 0

Our next question comes from Mark Levin with The Benchmark Company.

Speaker 6

Yeah, great. And echoing Lucas' comments, congratulations to the team on a great cash cost performance. I remember it wasn't that long ago where net cash costs were in the 90s and it's really, really quite an improvement. Let me let me ask you a couple of questions on cash. So, Andy, in in the fourth quarter, I guess, you referenced some confidence you'll get the $66,000,000 AMT refund.

So is I would assume it's reasonable to assume that your cash would build Q3 over Q4 or are there some other factors that we should be mindful of?

Speaker 3

I don't hey, Mark, by the way, I don't I hate to guide too precisely, again, just because we don't know where market price is going to fall out. It's been so inconsistent the past couple of months in particular. But I will say the third quarter every year is our heaviest cash burn quarter just because July is when all of our legacy payments hit. And so I certainly would expect the fourth quarter, all things being equal, to be considerably better from a cash usage or cash generation perspective in Q3. Again, I don't want to get into any specifics of projecting what that But looks I think just by virtue of not having those payments weighing upon us for Q4, we should be 30,000,000 to $40,000,000 better all other things being equal.

Speaker 6

Plus the $66,000,000 A and T refund, right?

Speaker 3

Plus the $66,000,000 correct.

Speaker 6

Right. Okay. Got it. And then you referenced the $17,000,000 cash collateral call or collateral call from third party surety providers. Maybe you can give us just a greater understanding of how to think about what the exposure is, how to model what those cash call collateral requirements could look like going forward.

I know this morning Peabody disclosed that they

Speaker 5

had

Speaker 6

reached a standstill agreement with their surety providers. Their situation is obviously markedly different. But I'm just kind of curious how to think about what the exposure looks like and then what to think about it going forward?

Speaker 3

Yes. The main exposure still is coming from thermal permits. The surety companies by and large aren't terribly excited about holding thermal permits and they're under the same pressures as all the other third party providers. Not only is there risk from a market perspective and just ongoing economics, but it also has a considerable amount of ESG risk involved from the surety's perspective themselves. So it's kind of hard for these surety guys to go upstairs and ask for permission to either even take new bonds or have to justify not requiring higher collateral levels.

So I think by and large, we're in a pretty good position on our bonds right now. We do continue to have conversations with our sureties, but we have a very long standing relationship with the sureties. Most of the book has been with us for many, many years going back to legacy alpha days. And so they've been partners with us for a long time and have been very patient through challenging markets. But I do think with what we did to shore up collateral in Q3, I think we're in pretty good position.

But to the degree that we continue moving away from thermal markets, that will only endure to our benefit.

Speaker 6

Is there a way, Andy, to quantify what the or how to maybe think about it?

Speaker 3

No. I mean, have to look at any given company's total bonding exposure. And then if

Speaker 6

you're And what is the total bonding exposure now?

Speaker 3

For us, we're I'm not sure I know that one off the top of my head. It's roughly going to reflect our undiscounted reclamation costs. But we'll snag that number in just a second. But the weighted average mix is what's going to get you. Any kind of thermal permit is Assurity is probably going to be looking for north of 50% collateral on that kind of a bond.

If it's met, you're going to be considerably lower than that. So it's just, again, to the degree that we can get away from thermal permits, because we're currently across our book, we're a little bit over 30% in total collateral. So on a weighted average basis, the MET is help pulling that number down. So again, I think we're in pretty good shape and shouldn't have too much incremental exposure from that perspective. But as we move forward, as the political climate moves forward, especially regarding thermal, all bets are off.

Speaker 6

Yes, that makes sense. That dovetails into something I'm sure you're not going to want to discuss too much, but I'm going ask anyway. You referenced ongoing progress with the NAPA asset sale. Maybe your degree of confidence, you know, one to 10 scale that you think you can get something done and then, you know, what the timing might be? And if you did do something, it require cash going out the door or would this be, at worst a cash neutral transaction?

Speaker 3

So actually to close out the loop Mark, this kind of partially answers a little bit of your question here. We do we have roughly $350,000,000 of bonds outstanding. Now that's more than just reclamation bonds that includes workers' comp, things like that. But of that $350,000,000 around $150,000,000 of that is Cumberland. So that kind of feeds into your closing On of the TIS a scale of one to 10, I would probably put our likelihood of getting a deal done at somewhere between one and ten.

Speaker 6

That's terribly not helpful, Andy. Thank you very much.

Speaker 2

Yes. Mark, it will be more than one, but less than 10. Excellent.

Speaker 6

That is the color that that is outstanding color.

Speaker 3

Can be real precise on my answer.

Speaker 6

But how about to the follow-up, which is, would it if you sold it and there were a buyer actually had to post all sorts of cash collateral, I mean, could you do a transaction or would is that the bottom line that you would do a transaction that was cash neutral? Or might a transaction involve you actually having to put some cash on it?

Speaker 3

Yes. Well, Mark, I think when you look at a deal like this because of the strategic benefit to the entire enterprise, you can mix and match lots of financial and non financial benefits on something like this. So is it possible to expect a transaction I mean, you envision a transaction where you could get some cash? Maybe. Can you envision one where you get some cash?

Maybe. So really, again, I hate to give you a non answer answer, but there are so many pieces that you can move around to benefit the overall enterprise. It's kind of hard to put a dollar tag to it without knowing all the other pieces in the mix.

Speaker 6

Okay. Perfect. Right. Fine. Get it.

I understand. There are lot of moving pieces. All right. My last question is just a really it's more the market and the met market in general. So since China announced their sort of unofficial import ban, have you guys seen any or would you I mean, I don't think you sell anything into China, but would you consider selling anything into China?

What are the kind of the puts and takes if trade flows start to change and they start to keep Australian coals out of their market for an extended period of time? And then the second piece is India, which is such an important market to seaborne coking coal demand. Maybe you can discuss a little bit what you're seeing out of that market recently and kind of what the book looks like there over the next three to six months or how you see that market?

Speaker 5

Go ahead, Dan. Hey, Mark. Yes, I'll start with the China, the trade war issue in China. We don't sell any coal to China. We're aware we've had a few inquiries.

By and large, Mark, as you know, they a lot of the coal that goes into China from Australia is low vol coal, that's We generally what they're looking

Speaker 3

don't export

Speaker 5

a whole lot of low vol. We're very balanced in our portfolio with it. So we're not pursuing actively at all any sales into China. We are aware of some inquiries and maybe some of our competitors have shipped a vessel or so over there. With regard to India, yes, very important customer, been pretty steady all year.

Like most customers, they had some slowdowns and some difficulties with the pandemic. But by and large, our shipments have remained steady there, I expect them to be steady into 2021.

Speaker 6

Yes. That's great to hear. Super. All right. Well, thanks very much for all of the time this morning, and congrats again on the cost performance.

Speaker 2

Thanks, Mark. This

Speaker 0

concludes our question and answer session. And I would like to turn the call back over to David Stetson for any closing remarks.

Speaker 2

Well, thank you very much. Thanks for everyone joining us this morning. Have a great end of your year, and we appreciate it so much. Thank you.

Speaker 0

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.